In these days and times, when budgets are tight, you may find that you can trade your service with another business to save on your cash flow. This is called bartering and it is becoming more popular. However, the fair market value of the property or services being bartered is taxable income to both parties.
The IRS has issued four facts on bartering:
- “Organized bartered exchanges A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves. Whether this activity operates out of a physical office or is internet-based, a barter exchange is generally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the IRS.
- Barter income Barter dollars or trade dollars are identical to real dollars for tax reporting purposes. If you conduct any direct barter – barter for another’s products or services – you must report the fair market value of the products or services you received on your tax return.
- Tax implications of bartering Income from bartering is taxable in the year it is performed. Bartering may result in liabilities for income tax, self-employment tax, employment tax or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a non deductible personal loss.
- How to report The rules for reporting barter transactions may vary depending on which form of bartering takes place. Generally, you report this type of business income on Form 1040, Schedule C Profit or Loss from Business, or other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations or form 1120-S for Small Business Corporations.”
So, now that we know what the IRS has to say, how do we record this in QuickBooks? During my research on this I found a couple of different methods for recording barter transactions. I’m going to giving the directions on the one I think is the best one to use.
Because you will be paying bills and invoicing and receiving payments from both a vendor and customer with the same name, you will have to distinguish them in QuickBooks since QuickBooks does not allow duplicate names in lists. For vendors you could add -v after the name and for clients/customers you could add -c.
- Go to your chart of accounts and click on new. Set up a new account called Bank and name the account Clearing Account (You can also call it Barter). If you use account numbers enter an account number. Click save and close.
- To record a barter transaction from the vendor go to the Vendor tab and Enter Bills and enter a bill for the vendor for the goods or service you are trading with from this vendor. Click save and close.
- Next you will enter an invoice for this Vendor/Customer just as you would for any other customer. Just don’t forget to use the Customer Name with the -c after it. Click save and close
- Now you are ready to receive payment for the invoice. Go to Receive Payment and enter the Customer Name, enter the amount, and mark the invoice to be paid. In the Deposit to field click the drop down arrow and change from Use Undeposited Funds as a default deposit to account to Clearing Account (or Barter). (If this file is not available to change you will need to go to Preferences > Payments and under the Company tab un-mark that box as the default). Click save and close.
- To pay the bill, go the the Pay Bills and mark the Vendor and invoice you are going to pay. At the bottom of the screen where is says Payment Account, click on the drop down arrow and change to Clearing Account (or Barter). Click Pay Selected Bills. On the next screen click done.
The clearing account can be reconciled just like any other bank account. If the trades are equal in value the account will be zero. If not, you may have to write a check or make a deposit to clear the account.